Predatory lending suits raise specter of assignee liability

Ameriquest Mortgage agreed last week to pay at least $7 million to settle predatory lending allegations in Connecticut, one of some two dozen states that are investigating the subprime lender's business practices. Whether the inquiries are a result of the lender's extraordinary public advertising campaigns piquing the attention of state attorneys general, or actual patterns of predatory lending, one of the lawsuits could bring other whole-loan market participants into the fold of litigation, sources report.

So far, state investigators have not singled out any secondary market participants for their role in purchasing subprime loans that end up being tagged as predatory, said Donald Lampe, a partner at law firm Womble Carlyle Sandridge & Rice, who focuses on predatory lending issues and counts some of the largest U.S. subprime mortgage lenders among his clients. Instead investigators have focused on the actual loan originators, but that could change, he added. Ameriquest was the largest subprime mortgage lender last year with roughly $82.7 billion in origination volume.

"Particularly with people like (New York State Attorney General) Elliot Spitzer out there - if they came to believe that Wall Street was complicit, they would not hesitate to go after participants in the secondary market process," Lampe said. As a result of a proliferation of predatory lending laws, which according to Lampe contain progressively larger penalties for assignees, protections are built into loan purchase agreements to shield against litigation.

One source at an asset management firm that buys Ameriquest loans said that, in general, he was more concerned with instances of loan fraud than with potential losses resulting from a predatory lending lawsuit. That's because his firm, like most, will not purchase loans that violate the state and local ordinances in which they were originated. If it turns out those loans are in violation, the issuer must purchase them back.

But Lampe said the agreements are not 100% guarantees. A jury in 2002 found Lehman Brothers jointly liable as an assignee in a predatory lending settlement with 18,000 borrowers against the now-bankrupt First Alliance Mortgage. The court ordered Lehman, which had become First Alliance Mortgage's sole investor in 1999, to pay $5 million in damages.

"What happens with assignee liability if it really sticks, is you can't assign the loan away. If you touch the loan, you are liable for life, even after you get rid of it. But what you're looking to do [with a purchase agreement] is mitigate your damages and mitigate your risk," Lampe said.

Officials in the Connecticut case did not use the state's assignee liability provision within its predatory lending law because the loans in question were not considered high cost loans, according to a spokeswoman with the Connecticut Department of Banking.

Ameriquest Senior Vice President Adam Bass said only that the company was "pleased to reach a fair resolution" with the state. Ameriquest reimbursed some 364 customers an undisclosed amount for prepaid finance charges deemed excessive, on top of $500 apiece in additional compensation. The company declined to comment on whether the terms of the settlement triggered a buy back of any securitized loans involved. The lender will pay the state $7 million. Last year, Ameriquest paid $670,000 to resolve similar allegations in the state.

Loretta Salzano, a partner at law firm Franzen and Salzano said her subprime lender clients are encountering cautious investors.

"We've had a lot of clients that have come back to us and said, the investor won't go for this.' I find they are being very conservative in most cases - checking points and fees." Salzano said investors should reassess loan purchase agreements to ensure they adequately cover any damage faced by such cases.

A class action settlement reached last month could cost Ameriquest as much as $50 million, according to the agreement. The class action lawsuit involved loans originated from 1996 through February 2004 to borrowers in California, Texas, Alabama and Alaska. The loans involved had rates greater than 0.9% over the good-faith estimate rate first assessed to the borrower. Some 1,671 customers could be entitled to as much as a 50% refund in prepayment penalties.

Some, such as Matthew Lee, executive director of the New York-based advocacy group Inner City Press/Fair Finance Watch, say fraud - on top of predatory lending - is prevalent in many subprime mortgage loans because of the commission-based nature of the wholesale mortgage loan market.

"It really appears as though Ameriquest is making up people's incomes," Lee said, adding that one woman's annual income was reported by a mortgage broker at $64,000, when she had not been involved with the company for a decade.

As a testament to the heightened scrutiny faced by the subprime lending giant, Lee's group recently created a website, www.innercitypress.org/

ameriquest.html solely to monitor daily developments in various predatory lending allegations against the company.